Friday, October 26, 2012

Across the country at top business schools, MBA students keep a watchful eye on all that's necessary to secure summer internships and full-time jobs. It requires hard, steadfast work these days to secure work. But through it all, they keep an eye on yet another ball--midterms now, final exams later. It's a task of terror to attempt to pile on 6-8 weeks of intermediate corporate finance into a few days.

On campus these days, including at the Consortium 17, students scramble to find jobs for 2013, ponder the presidential election in the days to come, rush off to case-group meetings, and bury themselves in cubicles to study for an exam in advanced accounting. The pulse is steady, even as many try not to worry too much about what will or won't happen by next summer.

Choices and Challenges

In between normal academic chores, Dartmouth (Tuck) MBA students found an interesting guest on campus two weeks ago, as part of the school's ethics program. Tuck hosts a "Choices and Challenges" series of speakers in the ethics program. It invites guests (experts, experienced managers, or alumni) to study, analyze and ponder tricky issues of ethics in business--from managing clients, employees and business units to managing portfolios, investing in new businesses and doing deals.

Andrew Fastow, the former CFO of Enron, came to Hanover (N. H.) to discuss what the current generation of MBA students might learn from the frauds and misrepresentations of the 1990s high-flying energy company, Enron. Fastow paid his dues by spending five years in prison. Now comes the time to share lessons learned and morals unearthed from years of Enron financial chicanery.

Fastow, who, too, has an MBA (from Northwestern), talked to students about deceitful off-balance-sheet transactions Enron employed. "I used loopholes in the rules," he said, "to get around the principles of of rules." He spoke to students also about "degrees of fraud," how fraud is not always committed in obvious ways, but in the way of incremental decisions and steps.

Rankings Hoopla

Business-school rankings, as just about every MBA student or dean knows, can be useful, but they can be dangerous, tricky and misleading. And among the dozen or so institutions and publications that present lists, which one (or ones) are most authoritative? Sometimes they can be inconsistent and wrong. Yes, list-compilers make errors, perhaps more frequently than they admit. The Economist magazine this month presented its list of the world's top business schools. Some Consortium schools, including UC-Berkeley and NYU-Stern, appeared on the list. The magazine, however, made an odd, somewhat embarrassing mistake with two other Consortium schools.

When the list first appeared, it placed Virginia-Darden no. 2, followed by Dartmouth-Tuck at no. 3--astounding achievements for both schools, when measured against business schools around the globe. However, shortly afterward, to its own chagrin, the magazine was forced to announce an egg-in-the-face correction. It had made an error. Its list was not what it meant. Dartmouth was supposed to be no. 2, and Virginia no. 3--probably an insignificant switch in a list of outstanding, prominent schools, but an embarrassment for the publication and a cause of wonder at Dartmouth, Virginia and perhaps all top schools.

Does this mean that such lists are wreaked with more than a few errors, inaccuracies and misrepresentations? ("Degrees of fraud," as Fastow would say.) Have there been cases in the past when list-producers have made errors, but were too embarrassed to announce a correction and decided to correct the error in another list the following year?

And which list to believe, use, discard, ignore or shrug off? Recent lists, for example, show the top school with the best faculty was Carnegie Mellon(Tepper) (by The Economist) and UC-Berkeley (by the Princeton Review).

An MBA for Vets

How about a new degree certification? The MBV. USC-Marshall this fall announced a new master's in business for veterans, essentially an MBA program geared for armed-forces veterans. The program starts in the fall, 2013. Plans call for a one-year, intensified program to leverage the experiences of verterans and to enhance leadership and organizational skills they gained in the services.

Trends in Apps

Business schools everywhere experienced application declines in the past year and are bracing more for declines in the coming admission season. The reasons have been hashed, explored and analyzed. Schools haven't concluded yet whether declines are a momentary dip or part of a new long-term trend (declines falling to a stable plateau).

One school, Cornell-Johnson, thinks declines may be due to factors beyond the sentiments of twenty-somethings and factors beyond tuition costs and employment uncertainties. Avoiding declines can be overcome, it says, by novel approaches to recruiting. Cornell reports its applications the past year were up 17%; revamped recruiting strategies have helped, it contends.

First of all, it has improved recruiting efficiencies--staging joint recruiting programs and presentations with other top schools. Second, it says applications increased because of aggressive efforts to reach out to under-represented minorities and international students in Asia and Latin America. Now in 2012-13, Cornell waits to see if this is a one-year spark or part of a welcome long-term trend in attracting top students to Ithaca.

Friday, October 19, 2012

Citigroup caught everybody off guard this week, when its board announced it had asked for the sudden resignation of CEO Vikram Pandit. Or did it catch anybody off guard? Was this a gesture investors pushed for?

Was it the right move for the big global financial institution that seemed to have leaped a hurdle to move beyond the darkest days of the financial crisis--back when there were moments when many thought its survival was in jeopardy?

Over the past few years, Pandit and team took appropriate, bold steps to make the behemoth profitable again. They sold assets en masse. They shuffled bad, non-performing, defaulted, bankrupt, and/or foreclosed assets into a special holding company and, little by little, sold off these positions, properties, securities and full operations. By doing so, it rid itself of spoiled segments and began to polish ongoing core operations. They downsized in every way possible--in just about every unit, operation, division, and geography. They finally sold its stake in the brokerage joint venture with Morgan Stanley (although at a large loss).

Earnings, too, had improved. In the days before Pandit's exit, Citigroup announced third-quarter income of over $460 million (somewhat misleading because of a handful of accounting adjustments banks are permitted or forced to do) and has boosted its equity capital base to over $185 billion. Returns on its capital base throughout 2012 have hovered between 5-8 percent-not stellar, but much better than the debilitating losses of years ago.

With regulators showing their hands in all aspects of its business and that capital structure, Citi has cooperated, even when it desperately wanted to resume paying a dividend to shareholders. Growing leaner, it felt comfortable settling in as the third or fourth largest bank in the U.S., below the first-place perch it had held for many years.

Pandit and team had unraveled the mammoth financial-services empire Sandy Weill and his own team constructed throughout the 1990s and early 2000s. Yet the board, under chairman Michael O'Neill, behind the scenes had been huddling to plan a Pandit departure. It appears Pandit had little clue.

Why then would a CEO who followed the marching orders of both government regulators and a corporate board be told his time is up?

Impatience with the stock price is always a reason. Over Pandit's five-year stint, shares of Citi have fallen 80 percent and more, even though share price is up 10-12 percent in 2012. The market may have appreciated the bank's revival, but perceived that the clean-up, the reengineering, and the resumption of basic banking aren't complete. The market perceived that other thorns or problems might still remain hidden in operations and haven't been resolved, sold off or at least shoved into the Citi Holdings, the special entity that corrals all the "bad assets" and prepares them for sale.

Investors and the board applaud Citi for separating out the bad assets. But the bad assets still reside with Citi and must be maintained, grappled with and funded. The board may have been pushing for Pandit hard to get rid of them with more urgency and haste--if only to present a new, cleaner, "de-risked," and unrestrained Citi. The bad assets of Citi Holdings remain as a scar on its overall balance sheet and a stinging reminder of the crisis.

Shareholders also seem to covet their dividends. Banks traditionally have rewarded their owners with a regular, comfortable stream of dividends. Pandit this past year felt financial improvements warranted Citi resuming paying a dividend; however, Citi sparred with regulators, who vetoed the move. Dividend-loving shareholders appear to have blamed Pandit for not making the improvements quickly enough to result in dividends or share repurchases to help give a jolt to the stock price.

Investors and the board, too, are likely peeking at the performance of peers, the other big banks (Goldman Sachs, Wachovia, and JPMorgan Chase, e.g.) that seem to have rebounded far more swiftly. Citi has escaped the starting blocks, but runs several strides behind the others.

Years ago, Pandit arrived at Citi after his stint at Morgan Stanley and after selling his hedge fund to Citi. He rose to become its CEO when previous CEO Charles Prince was pushed out when the public learned about Citi's crashing values of mortgage securities and mortgage-related structures. Pandit had been a successful fund manager. Re-juggling portfolios of assets, restructuring balance sheets and assessing the values of trading positions summarize Pandit's experiences and skills.

Citi is now at a pivotal point. Shareholders dream of 10-percent returns on capital and new respect in the banking community. And the board appears to have assessed that Pandit lacked expertise and deep experience in the trenches off basic banking: operations, branches, systems and technology, corporate lending, deposit taking, cash management, and custody. It needed a new leader that knew as much about the profitability of retail branches and the costs of doing money transfers as about valuing derivatives and mortgage securities.

So it tapped Michael Corbat, a long-time Citi banker with broad experiences in sales and trading, wealth management and international operations. In fact, board chairman O'Neill phrased it as something like a different horse for a different course. The board is pronouncing the restructuring phase as over, and it is time for Citi to become what it wants to be--large, omnipresent, global, familiar to all, yet simpler, basic, stable with boring, steady profits, 10-percent returns (at least) and, yes, quarterly dividend payments to owners.

Thursday, October 18, 2012

In ECB President Mario Draghi's words: "The worst is over for the EU crisis, but risks remain!". He was refering to the low inflation registered in the EU region. As long as the inflation is kept below 3%, the ECB is happy at keeping the benchmark refinancing rate and the deposit rate unchanged at 0.75% and 0% respectively, and the ultra low interest rate will spur economic growth in the EU.

However, not many economists share the same view with Draghi.

A London professor of economics, Costas Lapavitsas said:

"This misleading impression has been created by Mario Draghi of the ECB, who announced that he will lend freely to countries in trouble, driving interest rates down. There has been virulent opposition, led by the Bundesbank. For conservative German opinion, Draghi is the devil of Goethe's Faust, luring Angela Merkel into a deadly pact of inflation. Also for ECB lending to materialise, a country must accept tough austerity conditions. Which European politician will do that?"

Indeed, the austerity condition has already caused social unrest in Greece, Spain and other EU countries to go on strike in the streets as spending cuts tend to affect lower income groups, especially when the cuts are to welfare payments.

In addition, the fiscal union is not easy to realised as that would means centralised control of national budgets and tax policy in the Eurozone. Germany is the main driver behind the fiscal union as they want to make sure other EU countries do not overspend if they want to use the German's money!

We have already seen at the current European Summit that France and Greece are opposing the idea of fiscal union, they want "solidarity" to balance the budget austerity demanded by Germany.

Hence, the actual solution is not whether the interest rate is low enough to stimulate growth in the economy, it's the "confidence" that matters most. In order to judge whether the Euro crisis is over depends on how each of the EU members cooperate with one another, minimise their conflicts, and to reinstate the confidence back to the economy.

Monday, October 15, 2012

In this day and age, some prudent reluctance when it comes to spending is only to be expected from most people, especially if they have a family to care for. But no matter how much people might like to keep money in their savings account, the issue of possible medical expenses should not be ignored either. Someday, someone will get sick or injured which could drain you of all your savings. As such, paying for something like Medical Insurance would be a far better deal than having to shoulder all the burden of medical expenses later on.

So what is Medical Insurance?

When put in a broad perspective, Medical Insurance is simply the means by which you can protect yourself and your family from any financial trouble that would arise due to expenses incurred by medical issues. How the policy would accomplish this depends on the scenario, but having medical coverage will certainly help in a lot of ways which we will get into further along.Suffice it to say, Medical Insurance is incredibly important if you want to avoid substantial damage in case major medical procedures become necessary.

What are the uses of Medical Insurance?

Now to be more specific, Medical Insurance accomplishes its uses in a variety of ways, but in all of them it basically acts as a safeguard against financial damages or as an assurance of financial capability. For the more well-known example, we have the much needed surgical procedures which involve quite a lot of money. On their own, the medical expenses for this kind of service would be enough to devastate most people financially. With a policy for medical coverage though, the fallout is not as painful.

For another big benefit of having medical coverage, we have hospital admittance. Although it may not be pleasant to hear, the medical industry seems to have become rather obsessed with money of late and people have more of a chance to get admitted into hospitals and gain access to their best services if they are covered. Things that are often taken for granted like staff attention and prioritization are also easier to obtain if you have medical coverage.

Check-up prospects are also greatly enhanced when you have medical insurance because you would then be more thoroughly inspected for debilitating diseases. This allows you to take better care of yourself if a problem is detected sooner which translates to better survivability. Such a service is not available to everybody since the procedures involved in careful examinations often make use of rather sophisticated and expensive machinery.

Finally, the services of health professionals are also more easily rendered if you have medical coverage since a policy marks you as a client who has the ability to settle their bills. Such a statement is not meant to sow resentment towards good doctors since such an example does not extend to all of them, but it is also a fact that their services are not always theirs to dispense. It is also a fact that patients have a far greater chance at recovery and survival if they have a specialist monitoring their situation closely.

Thursday, October 11, 2012

In the past two weeks, national media outlets hopped on a storyline, proclaiming that MBA students and graduates in finance have reached a boiling point of discouragement in investment banking and other activities in financial services. The Financial Times and CNBC reported last week that MBAs at top schools are somewhat turned off to investment banking as a long-term career, at least based on hiring patterns the past few years. Yahoo reported similar trends last week.

The Financial Times reported the dimming in popularity of banking and finance in Wharton's recent MBA classes. In the past three years, the percentage of graduates entering banking has declined from 25% in 2008 to 16% in 2011. At Harvard, MBAs choosing banking declined from 10% of its class to 7%.

Are MBAs turned off? Or are they scared off? Are they turning away, or are they looking more closely at alternatives--like consulting and entrepreneurship? Is there a campus backlash toward the industry? Or has the industry done a poor job of attracting and retaining graduates? Are the numbers a misrepresentation of what might be occurring--that banks have become imprecise, whimsical and peculiar in their hiring processes?

The general consensus among students, graduates and perhaps deans and faculty is likely this: MBAs are not necessarily turning away from investment banking, as much as they might be fatigued at the industry's not being able to determine where it is going from here.

Faced with regulation, reform and not an inkling's notion of new sources of stable revenues, the industry has wavered in recruiting, hiring, development and retention. Discouraged MBAs are likely turning to other industries that can at least promise with some conviction a career path, upward mobility, a healthy environment, and--to say the least--a job for the next 3-5 years.

Each year, including at Consortium schools, thousands of new MBA students declare a possible interest in investment banking. As they learn more about industry uncertainty, they pay attention to exciting appeals from other industries. Little by little, they turn elsewhere--to industrial companies, to start-ups, to consumer companies, or to consulting.

Consulting continues to be a popular alternative, even while consulting and investment banking share common experiences--long hours, project orientation, client immersion, tight deadlines, industry specialization, compensation tied to incentives, prestige, and demanding clients. The consulting firms, it seems, have been more successful in recent years in offering a more defined, more predictable, and more certain career opportunity.

Investment banks, no doubt, have little problem in filling needs from year to year at all levels. At least the current needs for the moment. The positions become open, and supply of professionals always exceeds demand. When they huddle among themselves, industry leaders worry, however, whether they are attracting the best and brightest in finance, capital markets, financial analysis, and client management. In soaring times in the 1990s and mid-2000s, investment banking could lure those who might otherwise have been at the top of their fields in physics, astronomy, mathematics or law. Are the top banks now surrendering the creme de la creme to the payrolls at McKinsey or Booz Allen or to Kleiner Perkins, Google, Apple, Citadel, or John Deere?

MBA students and recent graduates who genuinely have an interest in banking wonder whether banks are taking the right steps, beyond lavish receptions and fly-backs to New York City, to improve the environment in investment banking? Are they focusing properly on the development of younger bankers and providing an environment to promote longer career stints? Have banks gone beyond the familiar mindset of hiring associates in large, flowing numbers when there is increased deal flow, only to dismiss them in waves when there is a hint of a downturn, with hardly a care about what they can do to help associates learn, improve, dissect markets, manage clients and prepare for a career of 10-plus years?

Many students and recent graduates don't necessarily think so. And that might be reflected in the recent trends.

What are other factors discouraging them from chasing after investment banking with the same passion and enthusiasm MBAs did only a few years ago?

1. Uncertainty and risks in choosing this career path. This has been discussed and hashed out often. MBAs who must invest tens of thousands in graduate education, beyond the opportunity costs from leaving current positions, are not sure they want to take the risk in going into banking roles, only to be dismissed less than two years later when a downturn of any kind threatens.

2. Work environment and work culture. The stories of the lifestyle of an investment or corporate banker are legendary--80-100-hour work weeks, little flexibility in schedules and weekends, and indifference to the contributions analysts and associates make. The industry always promises to improve the culture and make it more humane. The gestures in the short term are applauded; however, there is a long-term reluctance to change the environment. The pressure to generate revenues from an uncertain flow of deals supersedes the importance of tending to the day-to-day environment of associates.

3. A LIFO approach to managing personnel numbers. An ugly tradition of investment banking is to beef up hiring when the going is good and to reduce staff in droves when there lies a looming threat to deal flow or incentive compensation. Notwithstanding the performance and potential of analysts and associates, senior managers tend to take a LIFO approach--"last in, first out"--when orders from upstairs require staff reduction. MBAs are astute enough to know this practice might continue and wise enough to decide they may not want to be subject to it.

4. The relentless banter about re-engineering and restructuring in the industry. Since the financial crisis and in the midst of Dodd-Frank and Basel III reform, investment and corporate banking is evolving. Some contend a major overhaul is under way or about to happen. For new MBAs, there is continuing specter that drastic structural change is under way in how deals are done, how groups are formed, how clients are managed and how people are paid. MBAs may not be sure they want to launch careers when the industry is in the midst of soul-searching.

The numbers reflect souring sentiments. However, rest assured, at top schools there continues to be a core of students and graduates interested in corporate finance for finance's sake, not for the sake of what the industry always awarded--prestige, travel, headlines from deals, and lucrative bonuses. These are the MBA students and graduates who pursue banking because of the lure of the deal, the appeal of market activity, and the thrill of finding and delivering financial solutions to Fortune 500 companies.

They are the ones who withstand the ills of the environment and culture and see investment banking as a process of building crucial finance skills and experiences for the long, long career haul. They endure both the good and bad, appreciating newfound knowledge and understanding of markets. The declining trend is not yet alarming to banks, because supply is still steps ahead of demand and because hard-core finance graduates seem to always navigate their ways toward banking.